1. plan.be http://www.plan.be Does Offshoring of Materials and Business Services Affect Employment? Evidence for a small open economy Bernhard Michel (FPB and ULB) and François Rycx (ULB)

2. plan.be Outline Relevant empirical literature Belgian data on offshoring Estimation framework Results Conclusion

3. plan.be Relevant empirical literature – Offshoring and the labour market Pioneering papers: Feenstra & Hanson (1996, 1999) standard measurement of offshoring, US data, relative wages Follow-up papers: Strauss-Kahn (2002), Falk & Koebel (2002), Hijzen et al. (2005) European countries, employment of low-skilled workers Extensions and related papers: Egger & Egger (2003), Amiti & Wei (2005, 2006), Falk & Wolfmayr (2005) low-wage countries, services offshoring, total employment

4. plan.be Offshoring and employment Impact on total employment: - jobs lost: those employed in the offshored activity - cheaper inputs productivity gain in downstream production stages further reduction in employment, or expansion of production and employment - caveats: terms of trade, relative factor demands

5. plan.be Relevant empirical literature – Offshoring and total employment Seven papers: Amiti & Wei (2005, 2006), Cadarso et al. (2008), Falk & Wolfmayr (2005, 2008), OECD (2007a, 2007b) Labour demand framework augmented by offshoring term Individual country vs. Panel of countries Industry-level data Differences: calculation of the offshoring intensity, measure of employment (FTE or hours), controls, estimation methods,… Different results…

6. plan.be Relevant empirical literature – comparison of results

7. plan.be Measuring offshoring Standard measure (Feenstra & Hanson, 1996): ot i = j III ij / Y i Mostly computed proportionally using data from Input-Output tables and trade statistics Split into materials and business services offshoring om i and os i Split III by country of origin (Egger & Egger, 2003) Narrow offshoring vs Broad offshoring (Feenstra & Hanson, 1999)

8. plan.be Measuring offshoring For Belgium: - supply and use tables, 1995-2003 - NA vintage 2007 - constant prices of 2000 - use tables of imports (imported intermediates) - offshoring to different regions (oecd, ceec, asia)

9. plan.be Measuring offshoring – Data for Belgium Materials offshoringServices offshoring 200303/95200303/95 Total12.96%-0.2%2.02%9.2% OECD-2211.33%-0.7%1.92%9.0% CEEC0.50%10.8%0.03%19.3% SEAsia0.50%4.8%0.02%8.1% Source: own calculations

10. plan.be Measuring offshoring – Data for Belgium Materials offshoringServices offshoring 200303/95200303/95 Total 12.96% -0.2% 2.02% 9.2% OECD-2211.33%-0.7%1.92%9.0% CEEC0.50%10.8%0.03%19.3% SEAsia0.50%4.8%0.02%8.1% Source: own calculations

11. plan.be Measuring offshoring – Data for Belgium Materials offshoringServices offshoring 200303/95200303/95 Total12.96% -0.2% 2.02% 9.2% OECD-2211.33%-0.7%1.92%9.0% CEEC0.50%10.8%0.03%19.3% SEAsia0.50%4.8%0.02%8.1% Source: own calculations

12. plan.be Measuring offshoring – Data for Belgium Materials offshoringServices offshoring 200303/95200303/95 Total12.96%-0.2%2.02%9.2% OECD-22 11.33% -0.7% 1.92% 9.0% CEEC0.50%10.8%0.03%19.3% SEAsia0.50%4.8%0.02%8.1% Source: own calculations

13. plan.be Measuring offshoring – Data for Belgium Materials offshoringServices offshoring 200303/95200303/95 Total12.96%-0.2%2.02%9.2% OECD-2211.33%-0.7%1.92%9.0% CEEC0.50% 10.8% 0.03% 19.3% SEAsia0.50%4.8%0.02%8.1% Source: own calculations

14. plan.be Measuring offshoring – Data for Belgium Materials offshoringServices offshoring 200303/95200303/95 Manufacturing28.69%-0.5%1.15%12.4% Market services4.32%2.7%2.77%7.8% Source: own calculations

15. plan.be Measuring offshoring – Data for Belgium Materials offshoringServices offshoring 200303/95200303/95 Manufacturing 28.69% -0.5%1.15%12.4% Market services4.32%2.7% 2.77% 7.8% Source: own calculations

16. plan.be Measuring offshoring – Data for Belgium Materials offshoringServices offshoring 200303/95200303/95 Manufacturing28.69%-0.5%1.15% 12.4% Market services4.32%2.7%2.77%7.8% Source: own calculations

17. plan.be Estimation framework Conditional labour demand in log-linear form: L it = α + β 1 w it + β 2 r it + γ Y it Augment by offshoring variables in logs: om it and os it Make it testable (time and industry dummies, disturbance term, lags of explanatory variables): L it = α t + β 1 w it + β 2 w it-1 + γ 1 Y it + γ 2 Y it + (θ 1 om it + θ 2 os it + θ 3 om it-1 + θ 4 os it-1 ) + ε i + u it Regional splits (oecd, ceec, asia) can also be introduced Estimate (fixed effects) for 58 manufacturing and 35 service industries

18. plan.be Results – data used Dependent variable: employment in hours (employees) Controls: - wage rate: deflated compensation of employees per hour - value-added Offshoring (see above) Source: national accounts

19. plan.be Results – manufacturing sector Fixed effects estimation, 1995-2003, dependent variable employment totk=oecdk=ceeck=asia Constantyesyesyesyes Controlsokokokok om t 0.035 om t-1 0.046** os t 0.013 os t-1 -0.004 om_k t 0.012-0.0040.034*** om_k t-1 0.025-0.0110.019 os_k t 0.0130.0120.013 os_k t-1 -0.004-0.004-0.004 N464464464464 R2R2R2R20.9340.9370.9170.923

20. plan.be Results – service sector Fixed effects estimation, 1995-2003, dependent variable employment totk=oecdk=ceeck=asia Constantyesyesyesyes Controlsokokokok om t -0.018 om t-1 -0.009 os t -0.017 os t-1 0.001 om_k t -0.0180.028-0.045 om_k t-1 -0.0090.041**0.018 os_k t -0.0160.009-0.004 os_k t-1 -0.0000.0050.007 N280280280280 R2R2R2R20.8010.8020.7760.803

21. plan.be Results – summary Controls: - w: negative significant elasticity - Y: positive significant elasticity Offshoring variables: almost always not significant, in some cases om has a small positive impact on employment in manufacturing industries Offshoring does not have a significant impact on total employment in Belgium, the number of jobs lost due to offshoring is small compared to total labour market turnover.

22. plan.be Robustness tests Measure offshoring as share in total intermediate inputs instead of output Apply an industry-level correction for self-employed Estimate unconditional labour demand replacing output in volume by its price Specify a dynamic model with an autoregressive term and estimate it using GMM (dif and sys) The offshoring coefficients remained overwhelmingly non- significant.

23. plan.be Conclusion Improved measure for offshoring (data on imported intermediates, coherent constant price dataset) First estimations for Belgium Estimations for both manufacturing and market service sectors Results: offshoring has no significant impact on total employment - in line with earlier findings - small job loss compared to overall labour market turnover Further research: - impact of offshoring on productivity - impact on employment of low-skilled workers